Valley startups rising up from the graveyard

When Dave Kellogg arrived at Sequoia Capital on that day in early October 2008, "the last chair in the room was in the front row," he recalled. "My penance for being a little bit late."

Kellogg is the CEO of Mark Logic, a startup that helps business clients make sense of the chaos of unstructured data. He wound up with an excellent seat for an auspicious moment in Silicon Valley lore — the "R.I.P. Good Times" briefing that drove home the severity of the financial industry crisis for the startup economy. Initially intended exclusively for leaders of companies backed by Sequoia's investments, it would be inadvertently leaked by one CEO and sail around the Web like an early Halloween ghoul.

"The intensity of the message was very strong," Kellogg recalled. Sequoia's point, as he interpreted it: "They wanted me to curtail spending — and if I don't, and I need help, I won't get it."

Today, Silicon Valley is still struggling, with unemployment at 11.9 percent. But some other economic signs — including a rise in the stock market, a rebound in venture funding this quarter and Wednesday's encouraging Wall Street debut of Internet security firm Fortinet — suggest that the leaner, recession-tested tech sector may lead a gradual economic recovery.

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The latest MoneyTree venture capital report illustrated how clean tech is helping the valley flex its long-standing leadership status in tech. Bay Area startups, which usually attract about one-third of venture investments, landed a remarkable 46 percent of venture dollars during the quarter. Seven valley companies — three in the clean-tech sector — landed the largest funding deals during the period, adding to a sense of guarded optimism.

"I don't think we're completely out of the woods," Kellogg said. "But there is certainly more optimism."

Kellogg was one of four CEOs of Sequoia-backed startups who recently reflected on their companies' experiences during the past year in separate interviews with the Mercury News. Ken Comee of Cast Iron Systems, Selina Lo of Ruckus Wireless and Chris Barbin of Appirio, like Kellogg, recalled the sense of urgency at the "R.I.P." briefing and their responses to the economic wringer, including salary freezes, job cuts and canceled deals.

All four CEOs said their companies successfully navigated the recession and grew stronger in the process — in some cases capitalizing on the struggles of others. Their experiences reflected only part of the drama in an acutely Darwinian period for the valley.

Thousands of workers would be laid off in the valley at tech companies of all sizes; several startups whacked more than 30 percent of their payroll.

Looking back on the period, managers at some valley companies have complained that Sequoia's alarm caused unnecessary pain, prompting some unnecessary job cuts in healthy companies. Others say more companies might have gone belly-up if they hadn't been frightened into frugality.

"Sequoia took some heat, but it was the right thing to do," Comee said. "Some companies acted a little too late, or didn't cut deeply enough, and then had to cut again."

Sequoia partners, meanwhile, adhere to company policy that discourages a detailed discussion of what they consider internal business — even one that received wide distribution.

As Sequoia anticipated, the pace of venture capital investments slowed dramatically, forcing entrepreneurs to scrimp. Many unemployed tech workers, while looking for full-time jobs, have taken on projects at cost-conscious startups simply to demonstrate their skills and add a line on the résumé. Dying startups offered fire-sale prices for their business and intellectual property.

Some venture capital firms quietly went dormant, while others adopted strategies to stretch their dollars. But stronger firms such as Khosla Ventures, NEA and Norwest Venture Partners have all been able to raise funds exceeding $1 billion even while pension funds, university endowments and others were favoring less risky investments.

The recession, some say, accelerated certain technology trends. The fast growth of online games and "virtual goods," some suggest, might reflect the interest of consumers seeking low-cost entertainment instead of a night at the movies or a shopping spree. And controlling business costs are a prime selling point behind the rapid growth in on-demand "cloud computing" services as an alternative to enterprise software.

Cast Iron Systems and Appirio are engaged in different aspects of cloud computing.

When the financial crisis hit, Cast Iron's Comee thought his company was well-positioned for trouble. But the Sequoia briefing, he said, "was an 'act now' message, and I took it that way." He elected to trim "five or six jobs," which he characterized as "more of a nip-tuck than anything more severe."

At the same time, he sought to assure other employees because "people are on pins and needles about what it meant to them." One of his tasks, Comee said, was to emphasize that "we were in a great marketplace" because cloud computing was "counter cyclical in a down market. We were in a good spot to continue executing our vision and our plans."

In fact, less than three months after the Sequoia briefing, Comee said he approached his board about making new hires to take advantage of the company's opportunity.

Their initial reaction, he said, was "stony silence." But Comee persuaded them to agree to benchmarks of performance that enabled him to secure another $2.5 million in venture capital a few months later.

Mark Logic's Kellogg said he responded to Sequoia's briefing by trimming about five jobs and freezing salaries, stabilizing the work force at 117. "For the most part we just took our foot off the accelerator," he said.

By May, Sequoia and Tenaya Capital were sufficiently pleased with Mark Logic's performance to pump in another $12.5 million. Kellogg resumed hiring, bringing the work force to 150 employees today.

Barbin, the Appirio CEO, said he was poised to make an acquisition when he attended the Sequoia briefing. Afterward, Barbin said, "We called off the deal because we were now in a preserve-cash kind of environment."

Appirio, he said, avoided layoffs and its business has thrived through downturn. In a tough venture market, the company in February raised third-round funding of $10 million from GGV Capital and Sequoia. Appirio, so far, has opted against acquisitions, and Barbin said it is well-positioned to grow organically.

Ruckus Wireless CEO Selina Lo said she had decided to make some trims before Sequoia's warning, but "it made us go deeper."

Ruckus continued to grows through the recession as customers opted for its technology over rivals. But Ruckus, Lo said, also benefitted from lucky timing: It had money in the bank while two rivals were struggling. Given to occasional hyperbole, Lo said that one rival sold itself to a larger company "for a nickel" as it was running out of money.